These developments promise to overcome traditional barriers which have for all practical purposes kept many poor Indians out of the formal financial system. Consequently, not only will India see a spurt in financial inclusion, it will allow people to leapfrog into a digital era.January 30, 2017, 09:30 IST

Recently, two independent developments marked the advent of a new phase in financial inclusion. India Post Payments Bank received permission from RBI to start operations, making it the third such bank. Separately, government announced over 99% of adult population has been assigned an Aadhaar number. When juxtaposed, these developments promise to overcome traditional barriers which have for all practical purposes kept many poor Indians out of the formal financial system. Consequently, not only will India see a spurt in financial inclusion, it will allow people to leapfrog into a digital era.

Advances in communications technology have upended the staid world of banking. Today technology in banking has overcome barriers of physical inaccessibility. Therefore, a mobile phone with basic features has the potential to perform many banking functions, including money transfer. In this context, India Post along with telecom companies represents the entry of improbable banks. These banks, dubbed payments banks, are licensed to perform limited functions. Their asset is unparalleled reach right from the start. For instance, India Post starts with access to 1.54 lakh post offices, of which many are located in places without bank branches. Telecom companies, in turn, will be able to use millions of telecom recharging shops and an existing customer base.

By virtue of being granted a banking licence, payments banks will be able to combine their reach with infrastructure regulated by RBI to facilitate electronic payments. Simply put, in the next few years banking in India will spread wider and deeper on account of inherent strengths. This attribute will push people into cashless modes of transacting. In other words, digital payments will gain in importance in an organic fashion.

Given this context, it is important government create a conducive environment for the spread of digital payments. What is not needed is a policy which relies on complex cross-subsidies or punitive taxes on use of cash. These are anachronistic approaches. Instead the emphasis should be on creating an institutional architecture which facilitates competition. For instance technology fulfils its potential when there are no silos, so interoperability should be the touch- stone of the regulatory framework. Government, therefore, should focus on removing regulatory hurdles to the spread of technology in the financial sector. This approach will do more for moving India to a predominantly cashless economy. What's more it can be done without raising fresh taxes.

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